1 For the purpose of determining if you will meet the Maximum Net Asset Value (MNAV) test in subparagraph 152-10(1)(c)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997) on the disposal of your shares in Company A are you required to include the net asset value of Company A in the calculation?
1 No. Question 2 For the purpose of determining if your shares in Company A are an active asset at a given time under subsection 152-40(3) of the ITAA 1997, is the cash held in the term deposit considered inherently connected with the business? Answer 2 No. This ruling applies for the following period XX MM 20XX to XX MM 20XX The scheme commenced on XX MM 20XX
You are married. Neither you or your spouse carry on a business either as sole traders or in a partnership. Company A Company A was incorporated in 20XX. Your spouse has been the director and secretary of Company A since it was incorporated. Company A currently has XX ordinary shares on issue, you beneficially hold XX of these shares and your spouse beneficially holds XX of these shares. There have been no other classes of shares or preference shares in Company A that have been issued. Company A carries on a business with activities relating to the wholesale of goods. Company A has been profitable with a substantial portion of profits retained in the company rather than distributed to shareholders. Trust A Trust A is a trust established by a trust deed (the Trust A Deed) with Company B as the Trustee. The appointors of Trust A as named in the Schedule to the Trust A Deed are you and your spouse. Your spouse is the sole director, secretary and sole shareholder of Company B. Company B does not carry on any trading activities. Trust A has no trading activities and has made no income or capital distributions over the last 4 income years. Company C
Company B as trustee of the Trust A, holds 100% of the shares in Company C. Your spouse is the sole director of Company C. Trust B Trust B is a trust established by a trust deed (the Trust B Deed). You are the individual trustee for the Trust B. You are named as the appointor of the Trust B in Trust B Deed. Trust B has made trust distributions over the last 4 income years. Trust B owns a warehouse and leases it to Company A. Company A conducts its business operations out of the Warehouse. Company C also conducts its business operations out of the Warehouse.
Income Tax Assessment Act 1997 Subdivision 152-A Income Tax Assessment Act 1997 section 152-10 Income Tax Assessment Act 1997 subsection 152-10(1) Income Tax Assessment Act 1997 subsection 152-10(2) Income Tax Assessment Act 1997 section 152-15 Income Tax Assessment Act 1997 section 152-35 Income Tax Assessment Act 1997 subsection 152-35(1) Income Tax Assessment Act 1997 subsection 152-35(2) Income Tax Assessment Act 1997 section 152-40 Income Tax Assessment Act 1997 subsection 152-40(1) Income Tax Assessment Act 1997 subsection 152-40(3) Income Tax Assessment Act 1997 subsection 152-40(4) Income Tax Assessment Act 1997 subsection 152-40(3B) Income Tax Assessment Act 1997 subsection 152-47(1) Income Tax Assessment Act 1997 subsection 152-47(2) Income Tax Assessment Act 1997 subsection 328-
Question 1 Summary For the purpose of determining if you will meet the MNAV test in subparagraph 152-10(1)(c)(ii) of the ITAA 1997, you are not required to include the net asset value of Company A in the calculation. You are required to include the market value of the shares you hold in Company A and full net asset value of the Trust B. Detailed reasoning To qualify for any of the CGT small business concessions, an entity must satisfy several conditions that are common to all the concessions, known as the basic conditions. The basic conditions are contained in Subdivision 152-A of the ITAA 1997. The basic conditions set out in subsection 152-10(1) of the ITAA 1997 are: (a) A CGT event happens in relation to a CGT asset of yours in an income year (paragraph 152-10(1)(a) of the ITAA 1997) (b) The event would (apart from this Division) have resulted in the gain (paragraph 152-10(1)(b) of the ITAA 1997) (c) At least one of the following applies: (i) You are a CGT small business entity for the income year (ii) You satisfy the maximum net asset value test
(iii) You are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership (iv) The conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year (d) The CGT asset satisfies the active asset test. The note to subsection 108-5(2) of the ITAA 1997 has examples of CGT assets, that includes shares in a company and units in a unit trust. Subsections 152-10(2), 152-10(2A) and 152-10(2B) of the ITAA 1997 include additional basic conditions for shares in a company or interests in a trust. Maximum Net Asset Value Test Section 152-15 of the ITAA 1997 states that you satisfy the MNAV if, just before the CGT event, the sum of the following amounts does not exceed $6,000,000: (a) the *net value of the CGT assets of yours; (b) the net value of the CGT assets of any entities *connected with you; (c) the net value of the CGT assets of any *affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)). Affiliates
Subsection 328-130(1) of the ITAA 1997 defines an affiliate as an individual or a company which acts or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company. Under section 328-130, an individual or company must carry on a business to be an affiliate of another entity. However, under subsection 328-130(2) of the ITAA 1997 an individual or a company is not your affiliate merely because of the nature of the business relationship you and the individual or company shares. Net assets of entities connected with you Subsection 328-125(1) of the ITAA 1997 provides that an entity is connected with another entity if one of the entities controls the other entity, or if the two entities are controlled by the same third entity.
Under subsection 328-125(2) of the ITAA 1997, in the case of a company, an entity (the first entity) controls the company if the first entity, its affiliates, or the first entity together with its affiliates, own or have the right to acquire the ownership interests in the company that carry between them the right to receive a percentage that is at least 40% of: • any distribution of income by the company (subparagraph 328-125(2)(a)(i)) • any distribution of capital by the company (subparagraph 328-125(2)(a)(iii)), or • own, or have the right to acquire the ownership of, equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage that is at least 40% of the voting power in the company (paragraph 328-125(2)(b)). Subsection 328-125(3) of the ITAA 1997 states that an entity (the first entity) controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its affiliates, or the first entity together with its affiliates.
Under subsection 328-125(4) of the ITAA 1997, an entity will also control a discretionary trust if a trustee, in any of the last 4 income years, pays or applies at least 40% of any distributions of income or capital of the trust to the entity and/or its affiliates. Subsection 328-125(7) of the ITAA 1997 details that an entity can also 'indirectly control' an entity if the entity (the first entity) directly controls a second entity, and that second entity also controls (whether directly or indirectly) a third entity. In this case, the first entity is taken to control the third entity. Application to your circumstances Spouses or children taken to be affiliates for certain passively held CGT assets In your case, you own XX% of the shares in Company A, and your spouse owns XX%, neither you nor your spouse are carrying on a business individually to be considered an affiliate of each other, or of another entity under subsection 328-130(1) of the ITAA 1997.
The meaning of affiliate can be extended for a spousal relationship, under section 152-47 of the ITAA 1997. Subsection 152-47(1) deems an affiliate relationship with an individual's spouse where an asset owned by one entity is used in the course of carrying on a business by another entity, and the business entity is not otherwise an affiliate of or connected with the asset owner. Under subsection 152-47(2) of the ITAA 1997, a spouse is taken to be an affiliate of a taxpayer for the purposes of Subdivision 152. In your case, section 152-47 of the ITAA 1997 does not apply because it only deems spouses as affiliates in relation to CGT assets used in a business by another entity, it does not apply when the CGT asset being disposed of is shares and these shares are not used in carrying on a business. In the case where the CGT asset is shares, and these shares are not used by any entities in carrying on a business, your spouse will need to be your affiliate under subsection 328-130(1).
In this case your spouse is not your affiliate under subsection 328-130(1) and section 152-47 of the ITAA 1997. Therefore, you will not need to take into account the interests of your spouse in determining if other entities are controlled by you, or the net value of the assets of your spouse in determining if you satisfy the MNAV test for the disposal of your shares in Company A. Company A You own XX% of the shares on issue in Company A and your spouse is the director and holds XX% of the shares. In this circumstance, you do not have the right to receive at least 40% of either the income, or any capital distribution, made by Company A. You do not own or have the right to acquire equity interests in Company A to establish that you have at least 40% of the voting power in the company. Therefore, you do not have direct control and are not connected with Company A under subsection 328-125(2) of the ITAA 1997. The facts in this matter do not lead to a conclusion that you can be taken to indirectly control Company A under subsection 328-125(7) of the ITAA 1997.
Therefore, you are not required to take into account the net value of the CGT assets of Company A when determining whether or not you satisfy the MNAV test, on the disposal of these shares. The net asset value of XX% of the shares on issue in Company A that you own will need to be taken into account in determining whether or not you satisfy the MNAV test, on the disposal of these shares. Trust A You and your spouse are both appointors and beneficiaries of the Trust A. Company B acts as trustee for Trust A. Trust A has no trading activities and has made no income or capital distributions over the last 4 income years.
Under subsection 328-125(3) of the ITAA 1997, for you to control Trust A, the Trustee, Company B is required to act, or reasonably expected to act, in accordance with your directions or wishes, or in accordance with the directions or wishes of your affiliates. You do not hold shares in Company B. Your spouse is the sole director, secretary and sole shareholder of the Trustee of the Trust A. Your spouse is not your affiliate under subsection 328-130. Therefore, in this case, Trust A is not connected with you as Company B does not act, nor is it reasonably expected to act, in accordance with you, or your affiliates, directions or wishes. Furthermore, given the Trust A has made no capital distributions in any of the last 4 income years, you are not connected with the Trust A under subsection 328-125(4) of the ITAA 1997. Therefore, you are not required to take into account the net value of the CGT assets of Trust A when determining whether or not you satisfy the MNAV test, on the disposal of your shares in Company A. Trust B You are the trustee for the Trust B. As such you satisfy the direct control of a discretionary trust test in subsection 328-125(3) of the ITAA 1997 for Trust B.
As trustee of the Trust B, you have paid to or applied more than 40% of the income of the trust for your benefit over the last 4 income years. Under subsections 328-125(3) and 328-125(4) of the ITAA 1997 you are taken to control the Trust B and the Trust B is connected to you. Therefore, you will need to take into account the full net value of the assets of the Trust B in determining if you satisfy the MNAV test, on the disposal of your shares in Company A. Conclusion To determine if you satisfy the MNAV test on the disposal of your shares, the net asset value of Company A does not need to be included in the calculation. However, you are required to include the market value of the shares you hold in Company A and net value of the assets of the Trust B in determining if you satisfy the MNAV test, on the disposal of these shares. Question 2 Summary The cash held in the term deposit is not inherently connected with the business, for the purpose of determining if your shares in Company A are an active asset at a given time under subsection 152-40(3) of the ITAA 1997. Detailed reasoning
The CGT small business concessions condition in paragraph 152-10(1)(d) of the ITAA 1997 requires the CGT asset to satisfy the active asset test. Subsection 152-35(1) provides that a CGT asset satisfies the active asset test if: (a) you have owned the asset for 15 years or less and the asset was an active asset of yours for at least half of the test period specified in subsection (2), or (b) you have owned the asset for more than 15 years and the asset was an active asset of yours for at least 7 ½ years during the period specified in subsection (2). Subsection 152-35(2) of the ITAA 1997 provides that the test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases. Section 152-40 of the ITAA 1997 covers the definition of an active asset. For company shares and trust interests, subsection 152-40(3) of the ITAA 1997 provides that a CGT asset is an active asset at a given time if, at that time, you own it and:
(a) it is either a * share in a company that is an Australian resident at that time or an interest in a trust that is a * resident trust for CGT purposes for the income year in which that time occurs; and (b) the total of: (i) the market values of the active assets of the company or trust; and (ii) the market value of any financial instruments of the company or trust that are inherently connected with a business that the company or trust carries on; and (iii) any cash of the company or trust that is inherently connected with such a business; is 80 % or more of the market value of all of the assets of the company or trust. As you have held the Company A shares for less than 15 years the combined effect of section 152-35 and subsection 152-40(3) of the ITAA 1997 is that the shares will meet the active asset test if: (a) at least 80% of the market value of all of Company A's assets are active assets or financial instruments or cash that is inherently connected with the business that Company A carries on, to satisfy the requirements of section 152-40(3), and
(b) the shares must satisfy the active asset requirements of subsection 152-40(3) for at least half of the period that you have owned them. Cash and financial instruments are not active assets, but they count towards the satisfaction of the 80% test provided they are inherently connected with the business. This means a share in a company is an active asset at a particular time, if the company itself has active assets, inherently connected financial instruments, and cash; with a market value of at least 80% of the market value of all its assets. Paragraph 152-40(3B) of the ITAA 1997 states a share in a company is an active asset at a time if the share or interest fails to meet the requirements under subsection (3) at that time and the failure is of a temporary nature only. Inherent Connection The term 'inherently connected' is not defined in the Income Tax Assessment Act 1936 or the ITAA 1997. Therefore, the term takes its ordinary meaning.
Inherent connection necessarily requires something more than just some form of connection between the financial instruments and/or cash, and the business. A thing might be regarded as inherently connected to a business when it is a permanent or characteristic attribute of the business. Where a business is holding excess funds arising from a temporary spike in trading activity or the sale of a business asset, the excess funds might also reasonably be regarded as inherently connected with the business. A financial instrument and/or cash must be inherently connected with the business that the owner of the financial instrument and/or cash carries on, rather than any business a related entity carries on. The cash that Company A has invested in the term deposit is from accumulated profits from the business operations over the years. Aside from the funds in the term deposit, Company A has additional cash at bank.
In this circumstance, the funds in the term deposit from accumulated profits over a number of years, are not used, or accessed regularly for the business operations or as working capital. The company does not currently require the funds for use in its business operations and this is not a temporary state. Based on these facts the cash held in the term deposit is not inherently connected with the business and this cash cannot be counted towards the satisfaction of the 80% test at a given time.